SERVICE CLARIFIES DEPRECIATION RULES FOR NONRESIDENTIAL REAL PROPERTY, HORSES, AND SEMI-CONDUCTOR MANUFACTURING EQUIPMENT.

Rev. Proc. 88-22

SECTION 1. PURPOSE

This revenue procedure modifies Rev. Proc. 87-56, 1987-42, I.R.B. 4, by providing: a) correct recovery periods for asset classes 48.12 and 49.4, b) new asset class designations or descriptions for horses in asset classes 01.221 through 01.225, and c) corrected text for asset classes 22.3, 30.1, 36.0, 37.11, and 49.223. This revenue procedure also clarifies Rev. Proc. 87-56 by making it clear that: a) nonresidential real property that is contained in any of the asset classes set out in section 5.02 of Rev. Proc. 87-56 has an applicable recovery period set out for the asset class, and b) the assets described in asset class 36.1 include any semi-conductor manufacturing equipment.

SEC. 2. BACKGROUND

Section 168(e)(2)(B) of the Internal Revenue Code defines nonresidential real property as section 1250 property that is not residential rental property or property with a class life of less than 27.5 years. For purposes of the general depreciation system, section 168(c) provides that the applicable recovery period for nonresidential real property is 31.5 years. For purposes of the alternative depreciation system, section 168(g)(2)(C) provides that the applicable recovery period for nonresidential real property is 40 years. See Rev. Proc. 87-57, 1987-42 I.R.B. 17, 20.

SEC. 3. CLARIFICATION AND MODIFICATION OF REV. PROC. 87-56

01 Section 5.02 of Rev. Proc. 87-56 sets out the applicable recovery periods for nonresidential real property, and section 5.01 states that those recovery periods are not contained in the tables that follow. Sections 5.01 and .02, however, fail to state that the recovery periods for nonresidential real property apply in all events because those recovery periods are separately prescribed by statute.

Section 5.02 of Rev. Proc. 87-56 is clarified by adding the following paragraph at the end thereof:

Under section 168(e)(2)(B)(ii) of the Code, "non- residential real property" does not include any property described in an asset class with a class life of less than 27.5 years. Even if nonresidential real property is described in an asset class with a class life of 27.5 years or more, the applicable recovery period for that property is 31.5 years for purposes of the general depreciation system and 40 years for purposes of the alternative depreciation system, regardless of the applicable recovery periods set out for the asset class in the tables below.

02 Asset classes 01.22, 01.221, and 01.222 and their related text in section 5 of Rev. Proc. 87-56 are removed and replaced with the asset classes, class lives, recovery periods and associated footnotes set out in Table 1.

                       Rev. Proc. 88-22, Table 1

04 For purposes of the general depreciation system, the recovery period for asset class 48.12 is 10 years rather than 15 years.

05 For purposes of the alternative depreciation system, the recovery period for asset class 49.4 is 28 years rather than 20 years.

06 Asset class 22.3, "Manufacture of Carpets and Dyeing, Finishing, and Packaging of Textile Products and Manufacture of Medical and Dental Supplies," is corrected to read as follows:

Includes assets used in the production of carpets, rugs, mats, woven carpet backing, chenille, and other tufted products, and assets used in the joining together of backing with carpet yarn or fabric. Includes assets used in washing, scouring, bleaching, dyeing, printing, drying, and similar finishing processes applied to textile fabrics, yarns, threads, and other textile goods. Includes assets used in the production and packaging of textile products, other than apparel, by creasing, forming, trimming, cutting, and sewing, such as the preparation of carpet and fabric samples, or similar joining together processes (other than the production of scrim reinforced paper products and laminated paper products) such as the sewing and folding of hosiery and panty hose, and the creasing, folding, trimming, and cutting of fabrics to produce nonwoven products, such as disposable diapers and sanitary products. Also includes assets used in the production of medical and dental supplies other than drugs and medicines. Assets used in the manufacture of nonwoven carpet backing, and hard surface floor covering such as tile, rubber, and cork, are elsewhere classified.

07 Asset class 30.1, "Manufacture of Rubber Products," is corrected to read as follows:

Includes assets for the production of products from natural, synthetic, or reclaimed rubber, gutta percha, balata, or gutta siak, such as tires, tubes, rubber footwear, mechanical rubber goods, heels and soles, and rubber sundries; and in the recapping, retreading, and rebuilding of tires.

08 Asset class 36.0, "Manufacture of Electronic Components, Products, and Systems," is corrected to read as follows:

Includes assets used in the manufacture of electronic communication, computation, instrumentation and control systems, including airborne applications; also includes assets used in the manufacture of electronic products such as frequency and amplitude modulated transmitters and receivers, electronic switching stations, television cameras, video recorders, record players and tape recorders, computers and computer peripheral machines, and electronics instruments, watches, and clocks; also includes assets used in the manufactures of components, provided their primary use is in products and systems defined above such as electron tubes, capacitors, coils, resistors, printed circuit substrates, switches, harness cables, lasers, fiber optic devices, and magnetic media devices. Specifically excludes assets used to manufacture electronic products and components, photocopiers, typewriters, postage meters and other electromechanical and mechanical business machines and instruments that are elsewhere classified. Does not include semiconductor manufacturing equipment included in class 36.1.

09 Asset class 37.11, "Manufacture of Motor Vehicles," is corrected to read as follows:

Includes assets used in the manufacture and assembly of finished automobiles, trucks, trailers, motor homes, and buses. Does not include assets used in mining, printing and publishing, production of primary metals, electricity, or steam, or the manufacture of glass, industrial chemicals, batteries, or rubber products, which are classified elsewhere. Includes assets used in manufacturing activities elsewhere classified other than those excluded above, where such activities are incidental to and an integral part of the manufacture and assembly of finished motor vehicles such as the manufacture of parts and subassemblies of fabricated metal products, electrical equipment, textiles, plastics, leather, and foundry and forging operations. Does not include any assets not classified in manufacturing activity classes, e.g., does not include any assets classified in asset guideline classes 00.11 through 00.4. Activities will be considered incidental to the manufacture and assembly of finished motor vehicles only if 75 percent or more of the value of the products produced under one roof are used for the manufacture and assembly of finished motor vehicles. Parts that are produced as a normal replacement stock complement in connection with the manufacture and assembly of finished motor vehicles are considered used for the manufacture and assembly of finished motor vehicles. Does not include assets used in the manufacture of component parts if these assets are used by taxpayers not engaged in the assembly of finished motor vehicles.

10 Asset class 49.223, "Substitute Natural Gas-Coal Gasification," is corrected to read as follows:

Includes assets used in the manufacture and production of pipeline qualify gas from coal using the basic Lurgi process with advanced methanation. Includes all process plant equipment and structures used in this coal gasification process and all utility assets such as cooling systems, water supply and treatment facilities, and assets used in the production and distribution of electricity and steam for use by the taxpayer in a gasification plant and attendant coal mining site processes but not for assets used in the production and distribution of electricity and steam for sale to others. Also includes all other related land improvements. Does not include assets used in the direct mining and treatment of coal prior to the gasification process itself.

SEC. 4. EFFECT ON OTHER REVENUE PROCEDURES

Rev. Proc. 87-56 is clarified and modified. When Rev. Proc. 87- 56 is republished in the Cumulative Bulletin, it will reflect the changes made by this revenue procedure.

SEC. 5. EFFECTIVE DATE

This revenue procedure is effective as if Rev. Proc. 87-56 had originally contained the changes made by this revenue procedure.